FX Week Ahead: UK Elections, ECB and RBA meetings

Jun 05, 8:18 am
Theresa May_Brexit

The U.S. dollar takes a backseat this coming week with most of the action moving across the pond. While the ECB’s monetary policy decision will keep traders busy with the euro, the UK elections are also scheduled for the same day.

With the election race heating up, it goes without saying that all roads lead to the EURGBP currency pair this week. Elsewhere, the RBA’s monetary policy meeting is due followed by the first quarter GDP data.

UK General Elections – Will pollsters get it right this time?

The political landscape will cloud the British pound this week as the UK heads to the polls on Thursday. Prime Minster Theresa May’s Conservative party which was widely expected to win with a big margin is seeing tough competition.

YouGov Opinion polls (May 30 – 31). Source: YouGov
YouGov Opinion polls (May 30 – 31). Source: YouGov

The uncertainty in the polls has raised questions about the possibility of a hung parliament, or a coalition led government. This will potentially complicate the UK’s Brexit negotiations with the EU. The Brexit talks are expected to commence from June 19, giving very little time for dealmakers at Westminster.

The snap election was called by the PM Theresa May in hopes to consolidate her power. Ms. May became the Prime Minister after David Cameron resigned following the UK referendum verdict last June.

Last week, one of the polls from YouGov showed that there was also a possibility for Ms. May’s Conservative party to lose especially if it has a very slim majority in the parliament.

However, the uncertainty and the polls need to be taken with a pinch of salt given the record of the UK polling companies. The baseline scenario is for a Conservative party victory. No sooner do the elections conclude, focus will immediately shift to the Brexit talks with the Euro. So, volatility is likely to prevail in the British pound.

European central bank – Forward guidance to show policy tightening

As the European Central Bank is also scheduled to meet later in June, the economic data this week will be of importance as the ECB comes under pressure to cut back on its easy monetary policy.

Among the data scheduled from the eurozone next week, the flash inflation estimates for the month of May will stand out. Oil prices have pulled back from the previous highs which could result in the inflation figures taking a step back.

The top event from the Eurozone this week will be the Thursday’s monetary policy meeting. No changes to interest rates are expected at this week’s meeting, but there is wide speculation that the central bank could tweak its language on forward guidance.

Despite the likelihood of a hawkish tone from the ECB, the current monetary policy is expected to remain steady at least in the near term. Furthermore, the recent flash inflation estimates further cloud the outcome from the ECB.

The central bank will also be giving the staff forecasts on the economy. In the monetary policy meeting in March, the ECB projected the annualized GDP growth to be at 1.8%. The HICP inflation was forecast at 1.7% annualized while core HICP is expected at 1.1% for 2017. There is a possibility that these numbers could be revised higher, at least as far as growth is concerned.

Inflation figures are likely to remain unchanged or come with a risk of a downward revision.

Besides the ECB meeting, other data over the week includes the Eurozone final PMI numbers and the revised first quarter GDP data which are expected to confirm that the economy grew at a pace of 0.5% in the three months ending March 2017.

ISM non-manufacturing PMI

From the U.S., the ISM’s non-manufacturing PMI will be coming out on Monday. Data is forecast to show no major changes, and the data is unlikely to garner much attention given that it comes after last Friday’s payrolls report.

As far as the Federal Reserve is concerned, this week marks the black-out period, so there will not be any speeches from Fed officials.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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